Meeting 5, 2020
CBOE and CME Pitch
- Overview of Portfolio Actions & Vote
- PART 1: Report
- Industry Overview & Competitive Positioning
- PART 2: Appendix & Calculations
- Compare Historical Fundamentals
- Comparing Returns
- Prices
- Big Comp Table
- Revenue Per Share
- Net Income Per Share
- Free Cash Flow Per Share
- Tangible Book Value Per Share
- Shareholders Equity Per Share
- Interest Payments + Debt Per Share
- Market Cap
- Enterprise Value (EV)
- Price to Earnings (PE) Ratio
- Price to Sales Ratio
- Enterprise Value to Sales
- EV / EBITDA
- EV to Operating Cash Flow
- EV to Free Cash Flow
- Debt to Equity
- Debt to Assets
- Net Debt to EBITDA
- Current Ratio
- Capex to Operating Cash Flow
- Capex to Revenue
- Capex to Depreceation
- Stock Based Compensation to Revenue
- Grahams Number
- Return on Invested Capital (ROIC)
- Return on Tangible Assets
- Working Capital
- Tangible Asset Value
- Invested Capital
- Average Receivables (amounts owed to the business, regarded as assets)
- Working Capital
- Tangible Asset Value
- Invested Capital
- Average Receivables (amounts owed to the business, regarded as assets)
- Finviz Data Scraper Z-Scores
- Historical Financial Statements
- Modelling and Forecasting
Overview of Portfolio Actions & Vote
Proposals to BUY: 54 CBOE, at the Market
- 5-Year fair value per share around $207 (148% ROI)
37 CME, at the Market.
- 5-Year fair value per share around $422 (153% ROI)
Sell:
BRK.B - Berkshire hathaway - all held, at the market NKE - - all held, at the market
Reasons: BRK.B - Not innovative, Not a good time for insurance ,Big polluter, Warren buffet will die soon
Reasons: NKE - We want to sell nike because it has more than doubled since we bought it, we figure the cash is more useful for rebalancing and the stock has far surpassed our fair value appraisals.
Vote: Yes: 4 No: 1 Abstain: 1
The club APPROVES the above portfolio actions
PART 1: Report
Business Description
CME Group: CME Group Inc. is a global markets company. It is the world's largest financial derivatives exchange, and trades in asset classes that include agricultural products, currencies, energy, interest rates, metals, and stock indexes. (wikipedia)
CBOE Group: The Chicago Board Options Exchange (CBOE), located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around 1.27 billion contracts at the end of 2014.[1] CBOE offers options on over 2,200 companies, 22 stock indices, and 140 exchange-traded funds (ETFs).
Industry Overview & Competitive Positioning
Companies in the exchange services industry facilitate market making operations for their constituents. Companies within this sub-industry normally own a number of exchanges that list a wide variety of investment vehicles. Some of these more traditional products are things like US Equities, corporate bonds, and government notes. Exchanges also tend to list products that help investors gain exposure to the broader capital structure. This could be index futures, options contracts, commodity and sector-specific ETFs, ect.
Operating an exchange requires immense upfront costs, and the market structure of the sector generally resembles some form of oligarchy. CME has a large degree of pricing and monopoly power when it comes to futures markets, while CBOE has the cost advantage in the options market. Together these firms have an effective monopoly on the supply of speculation tools to stock market investors. Oftentimes these products are vital to hedging portfolios, a sort of insurance strategy that many employ in an attempt to curtail and control risk.
Investment Summary
CBOE and CME would help lower the general volatility in our holdings. A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Our portfolio average beta is around 1, so while we do not have more volatile returns than the index, the addition of these firms might help stabilize our returns in the future.
CBOE and CME can battle cyclicality by making money when equities perform poorly. These companies make money by existing where money flows between buyers and sellers, and their toplines are a function of how much trading is going on which is less directly tied to credit market risk than other financial institution balance sheets. This provides nice cyclical protection since the broader market might be selling off, but during periods of large declines, or increased volatility, we tend to see more volume (more shares being bought and sold in total in a given period).
CBOE and CME would increase our financial services exposure without being tied to a bank. Although the contraction from the coronavirus shock may continue to weigh on economic growth, and a double dip or more prolonged contraction is in the cards, we think financial services are a staple to the domestic economy, especially companies that exist at the intersect of markets and technology, and will continue to find opportunities for growth over the course of the next expansion.
Investment Risks
Because CME & CBOE rely on the liquidity of the counterparty's in the transactions they facilitate, if investors are illiquid, there will likely be less commissions to collect.
CBOE has a high PEG ratio (how expensive a stock is relative to its expected earnings growth) which might indicate that it is not growing its earnings enough to justify recent price increases.
CME & CBOE have also seen declining market shares in recent years as technology lowers the barriers to entry for new clearing houses, however due to the dominance and institutionalization of contracts like Eminis (CME) and Bitcoin futures (CBOE), we believe that these companies will generally have the upper hand in implementing innovations and novel products.
Corporate Governance & Sustainability
CME boasts that their corporate governance values are ethical and responsible. There are fair workers rights for all members and stakeholders. CBOE offers committee transparency by releasing press reports that include its own sources to improve investor relations.
CME ESG Risk : 15 on Yahoo Finance - 7th Percentile of all stocks
CBOE ESG Risk: 20 - 25h Percentline
Valuation
Our scenario analysis implies that as long as revenues grow at least by 6% per year, we will see lofty returns on investment.
Avg income growth is around 18% while avg free cash flow growth has been much higher, we ran our 5 year terminal value models on all 5 firms using a fixed growth rate to show the relative payoffs of each investment.
Compare Historical Fundamentals
FORMULAS FOR ALL RATIOS: https://financialmodelingprep.com/developer/docs/formula/
make_multi_LineGraph(float_g, True)
make_multi_LineGraph(ratios_g, False)
make_multi_LineGraph(ratios_g, True)
DCF Models With a Shock to Growth in Year 1
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